Run for the money

June 1, 2012 12:00 AM

These days an increasingly digitally connected consumer that's doing even more of her shopping online and the growing number of "for rent" and "space available" signs popping up in front of malls and shopping centers speak volumes about the shifting—and increasingly competitive—landscape of online retailing in the U.S. and Canada.

Not so long ago, a recognized retail brand, a decent e-commerce site and aggressive pricing were enough for a retailer to grow steadily online. The rising tide of e-retail lifted practically all web merchants' boats.

But today web retailing is bigger and more competitive, and the winners increasingly are separating themselves from the pack. Web-only retailers in particular are taking market share, and it's not just e-retail's juggernaut, Inc. (No.1). An analysis of the data from the newly published 2012 Internet Retailer Top 500 Guide shows just how quickly and significantly the U.S. and Canadian business-to-consumer e-commerce market is changing.

Consider these facts:

  • The retail industry grew as a whole in 2011, but e-commerce remains the fastest-growing channel. While total U.S. retail sales as measured by the U.S. Department of Commerce grew year over year about 5.6% to $2.88 trillion from $2.73 trillion, total U.S. e-commerce sales grew 16.1% to $194.3 billion in 2011 from $167.30 billion in the prior year. All Top 500 retailers, including both those based in the U.S. and Canada, grew sales year over year 20.4% to $180.73 billion from $150.13 billion.
  • Amazon again outpaced the market. The No. 1 e-retailer increased its sales 40.6% to $48.08 billion in 2011 from $34.20 billion in 2010. Amazon's growth rate was double that of the Top 500 as a whole, including Amazon. Without Amazon, the Top 500 grew 14.4%.
  • Web-only merchants continue to take market share from everyone else. In 2011, Top 500 web-only merchants grew much faster than every other merchant type—about 32% to a combined $73.39 billion in 2011 from $55.68 billion in 2010. Even without Amazon, online-only merchants in the Top 500 grew their combined sales by 17.8% to $25.31 billion from $21.48 billion in 2010, a higher growth rate than any other type of merchant.

The pack

Other categories of web retailers also grew e-commerce last year, but not as much as Internet-only merchants. Store-based retailers grew year over year by 14.7% to $64.63 billion from $56.36 billion, while Top 500 catalog/call center companies increased their combined web sales about 12.3% to $22.32 billion in 2011 from $19.87 billion in 2010. Collectively, the consumer brand manufacturers ranked in the 2012 Top 500 grew their combined web sales year over year about 12% to $20.40 billion from $18.21 billion.

  • Chain retailers are counting on the web to do what their stores aren't doing: driving strong sales growth. In 2011 the web was the fastest-growing channel for 89.9%—62—of the chain retailers ranked in the Top 500 that break out store sales and other financials. For 67 of those retail chains—93.1% of the total—the growth online exceeded or at least equaled the growth in annual comparable-store sales. The disparity between online and offline results is driving many retail chains to close stores. An analysis of the major chain retailers ranked in the Top 500 in 2011 and 2010 shows that their total store count declined year over year 0.5% to 116,457 locations from 117,082.
  • In some product categories, such as books and music, the web is on its way to becoming the dominant way consumers shop. The sale of electronic reading devices, such as the Kindle from Inc. (No. 1), the Nook from Barnes & Noble Inc. (No. 32) and the iPad from Apple Inc. (No. 3), is a big reason behind the shift to consumers buying more of their books in digital form via the web. Bookstore sales in the U.S. declined year over year nearly 1% to $15.53 billion from $15.62 billion, according to the Department of Commerce. In comparison the growth in combined sales for Top 500 books/music/video merchants increased 20.4% to $6.63 billion. More important, Top 500 books/music/video retailers accounted for 40.1% of sales in the category in 2011, compared with about 33% in 2010.
  • The big keep on getting bigger. Driven by Amazon, which increased its sales year over year 40.6% to $48.08 billion from $34.20 billion, the Top 100 accounted for 87%—$157.23 billion—of all Top 500 sales, compared with 86.1%—$129.2 billion—in the prior year. Amazon's 2011 North American sales of $26.70 billion alone accounted for 14.8% of all Top 500 sales and 13.7% of all U.S. e-commerce sales. Among individual merchant types, Amazon's sales represented 65.5% of all Top 500 web-only sales, compared with the biggest retail chain, Staples Inc. (No 2), which with 2011 web sales of $10.6 billion accounted for 16.4% of all top 500 chain retailer sales, and Apple which accounted for 32.7% of sales among all Top 500 consumer brand manufacturers with Internet Retailer-estimated e-commerce sales of $6.66 billion. Among catalog/call center companies, the 2011 Internet Retailer-estimated web sales of $3.76 billion for Liberty Interactive Corp. (No. 7), which owns QVC Inc., represented 16.9% of all category sales.

The online retailing industry as a whole continues to put up healthy annual sales, and that's not likely to change. But to remain competitive, web retailers must keep pace with the changes in shopping behavior of today's increasingly digitally connected shoppers who can use their smartphones or tablet computers to research products and buy online whenever and wherever they want.

"There's not a lot of room to be a one-trick pony in the e-commerce business these days unless you are a truly unique niche merchant with merchandise that nobody else has," says Paula Rosenblum, managing partner of research and advisory firm Retail Systems Research LLC. "The leaders who are going to keep on making more space between themselves and their competitors are the ones that are keeping their brand and user experience relevant."

Many retail chains, in particular, seeing more consumers shopping online or checking e-retailers' prices while in bricks-and-mortar stores, need to concentrate more on any available e-commerce opportunity and on using the web more effectively to drive sales across all channels," Rosenblum says. "I sometimes think chain retailers don't understand their customers and their path to purchase because they don't necessarily want to go to more stores," Rosenblum says. "Instead they want their favorite retail brands to save them time and make it more convenient to shop, and the opportunity to do that is online."

Chain reaction

Top 500 data show that it wasn't necessarily the biggest retail chains that grew the most online last year. Web sales for the top 100 chain retailers increased year over year about 15.6% to $56.7 billion from $49.0 billion, well above the growth rate for all Top 500 retail chains of 14.7%. But the fastest-growing group among chain retailers was those ranked from 301 to 400 that collectively grew their sales 17.0% to $990.3 million in 2011 from $846.3 million in the prior year. Among the leaders in that cohort were Party City Corp. (No. 302), which grew e-commerce 200% to $40.2 million in 2011 from $13.4 million in 2010, and Tilly's Inc. (No. 304). Web sales for Tilly's increased 41.6% to around $40 million year over year from about $28.3 million.

In many cases, retail chains are closing stores, and some are pouring significantly more resources into their web channel—and expecting even greater results. Over the next five years Nordstrom (No. 31) will sink nearly $1 billion into its e-commerce infrastructure in an effort to grow web sales, which increased 30% to an Internet Retailer-estimated $916.5 million in 2011. Having increased sales 36.2% to just over $1 billion in 2011, Kohl's Corp. (No. 28) is spending up to $500 million over the next several years to open as many as five regional fulfillment centers to support its e-commerce operations. And Lowe's Cos. Inc. (No. 47) credits more than doubling the number of SKUs it offers online to about 225,000 as a key reason web sales increased 70% to an Internet Retailer-estimated $510 million in 2011.

At upscale department store chain Saks Fifth Avenue (No. 38) web sales increased 28% to an Internet Retailer-estimated $748.6 million in 2011 as the company embarked on a five-part e-commerce upgrade strategy that included adding on major new functions such as more advanced site search, improved iPhone and iPad mobile apps, deeper editorial content such as a new online magazine site, SaksPOV, and expanded private-sale events. "We had a fairly typical year for us," says Saks chief marketing officer Denise Incandela. "We began acting on a plan two years ago to address how more digitally connected consumers are shopping today."

Advancing retailers

Like retail chains, other types of web merchants such as catalogers, web-only merchants and consumer brand manufacturers are concentrating on growing their niche businesses, looking for new opportunities in areas such as mobile commerce or laying the groundwork to sell internationally via the web.

The fastest-growing Top 500 retailer in the latest ranking is web-only merchant (No. 440), which increased 2011 web sales by about 359% to $20.2 million from $4.4 million in 2010. Jackthreads is on the sales fast-track because the company is focused exclusively on servicing its core shopping audience of fashion-conscious young men. To enhance growth online last year Jackthreads developed a broader social media program by adding new features such as a $10 credit for a member whose product Like on the company's Facebook page leads to a purchase by another shopper, says CEO Jason Ross. "We added some social tools in 2011 and made it easy to share items through Facebook and Twitter when a shopper is making a purchase," Ross says.

At QVC, the biggest Top 500 catalog/call center operator, U.S. web sales last year increased 25.6% to $2.16 billion from $1.72 billion in 2010 in part because the company is pushing heavily to generate more online sales from consumers shopping on mobile phones and tablet computers. At its annual investor's conference in New York in November, QVC CEO Mike George said QVC was on track to generate total mobile sales of about $380 million worldwide in 2011, including about $220 million in the U.S. "Some of our best customers are engaging with us the most on their mobile device," George told analysts.

For some consumer brand manufacturers, the key to growth in the increasingly competitive online apparel and accessories market is becoming more of an international web merchant. In 2011 Tory Burch (No. 240) grew web sales year more than 90.3% to $59 million from $31 million and then laid the foundation for developing more Internet business overseas. With a new e-commerce platform from Demandware Inc., Tory Burch now has nine international web stores up and running, a number that the company expects to reach 30 in 2012, says chief marketing officer Miki Berardelli. "We are on our way to becoming a more global e-commerce brand," Berardelli says.

Lagging behind

In a fast-changing online retailing market some Top 500 merchants came up short in 2011. In just the past year, in addition to being acquired through bankruptcy by Dish Network Inc. and closing about 3,000 stores, Blockbuster (No. 133) lost more than three-fourths of its online sales, falling to an Internet Retailer-estimated $136.5 million from $569.3 million in 2010. That was primarily the result of big drop in customers of Total Access, which gave subscribers the option of returning their online rental DVDs by mail or exchanging them at participating Blockbuster stores.

In the wake of an ongoing company restructuring, web sales for Coldwater Creek Inc. (No. 134) dropped 29.2% to an Internet Retailer-estimated $136 million in 2011 from $192.1 million in 2011, while a drop in the popularity of a line of athletic shoes contributed to a decline in web sales for Skechers USA Inc. (No. 441) of 27.2% to $20.1 million in 2011 from $27.6 million in 2010.

Going forward, many Top 500 chain retailers are counting on growing their e-commerce sales for a very simple reason: They're trying to remain relevant with consumers in a fast-changing digital world where more consumers are shopping by tablet computer, pulling out their smartphones at the mall to comparison shop for the best deal, and sharing their shopping likes and dislikes with family and friends over Facebook, says Kent Allen, principal and founder of The Research Trust, a San Francisco-based e-commerce and retailing industry research firm.

"The Great Recession from a few years ago should have taught retailers they don't need as many stores as they once had," Allen says. "Today consumers aren't just automatically heading to the mall. Instead they are using their computer or smartphone to research who has the best inventory at the best price and then making the purchase online with an option to have the merchandise sent to their favorite store."




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